-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, A9oTiH06T1tynRso/OCvYIT5wdcuu6ZL0G3dMHmQvG1pIhRVDa8qh0cHih8+6/L7 zpiwx1ps9lcO8QV7Csb2AQ== 0000950152-97-003581.txt : 19970507 0000950152-97-003581.hdr.sgml : 19970507 ACCESSION NUMBER: 0000950152-97-003581 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970506 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: WAXMAN INDUSTRIES INC CENTRAL INDEX KEY: 0000105096 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-HARDWARE & PLUMBING & HEATING EQUIPMENT & SUPPLIES [5070] IRS NUMBER: 340899894 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10273 FILM NUMBER: 97596469 BUSINESS ADDRESS: STREET 1: 24460 AURORA RD CITY: BEDFORD HEIGHTS STATE: OH ZIP: 44146 BUSINESS PHONE: 2164391830 MAIL ADDRESS: STREET 1: 24460 AURORA ROAD CITY: BEDFORD HEIGHTS STATE: OH ZIP: 44146 10-Q 1 WAXMAN INDUSTRIES, INC. 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997 -------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FROM TO Commission File Number 0-5888 WAXMAN INDUSTRIES, INC. ----------------------- (Exact Name of Registrant as Specified in its Charter) DELAWARE 34-0899894 -------- ---------- (State of Incorporation) (I.R.S. Employer Identification Number) 24460 AURORA ROAD BEDFORD HEIGHTS, OHIO 44146 --------------------- ----- (Address of Principal Executive Offices) (Zip Code) (216) 439-1830 -------------- (Registrant's Telephone Number Including Area Code) NOT APPLICABLE -------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety (90) days. Yes X No --- --- 9,848,876 shares of Common Stock, $.01 par value, and 2,149,771 shares of Class B Common Stock, $.01 par value, were outstanding as of May 1, 1997. 2 WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES ---------------------------------------- INDEX TO FORM 10-Q ------------------ PAGE ---- PART 1. FINANCIAL INFORMATION - ------------------------------ Item 1. Financial Statements (Unaudited) Condensed Consolidated Statements of Operations for the Nine Months and Three Months Ended March 31, 1997 and 1996............................................... 3 Condensed Consolidated Balance Sheets as of March 31, 1997 and June 30, 1996.................... 4-5 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 1997 and 1996................................................... 6 Notes to Condensed Consolidated Financial Statements............................................. 7-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-14 PART II. OTHER INFORMATION - -------------------------- Item 5. Other Information...................................... 15 Item 6. Exhibits and Reports on Form 8-K....................... 15 SIGNATURES - ---------- EXHIBIT INDEX - ------------- 2 3 PART 1. FINANCIAL INFORMATION - ------------------------------ ITEM 1. FINANCIAL STATEMENTS WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES ---------------------------------------- CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS ----------------------------------------------- (UNAUDITED) FOR THE NINE MONTHS AND THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (IN THOUSANDS, EXCEPT PER SHARE DATA)
Nine Months Ended Three Months Ended March 31, March 31, --------- --------- 1997 1996 1997 1996 ---- ---- ---- ---- Net sales $199,616 $175,477 $ 65,628 $58,543 Cost of sales 129,634 119,939 42,417 42,813 ------- ------- ------- ------ Gross profit 69,982 55,538 23,211 15,730 Operating expenses 50,468 47,978 17,116 18,198 ------- ------- ------- ------ Operating income (loss) 19,514 7,560 6,095 (2,468) Interest expense, net 12,541 19,934 4,295 6,608 ------- ------- ------- ------ Income (loss) before income taxes, minority interest, discontinued operations and cumulative effect of change in accounting 6,973 (12,374) 1,800 (9,076) Provision for income taxes 6,130 295 2,091 107 ------- ------- ------- ------ Income (loss) before minority interest, discontinued operations and cumulative 843 (12,669) (291) (9,183) effect of change in accounting Minority interest in consolidated affiliate 4,411 - 1,554 - Reversal of loss on disposal of business - (11,000) - (11,000) Cumulative effect of change in accounting - 8,213 - - ------- ------- ------- ------- Net income (loss) $ (3,568) $( 9,882) $ (1,845) $ 1,817 ======= ======= ========= ===== EARNINGS PER SHARE: Income (loss) before minority interest, reversal of loss on disposal of business and cumulative effect of change in accounting $ .07 $ (1.08) $ (.02) $ ( .78) Minority interest in consolidated affiliate (.37) - (.13) - Reversal of loss on disposal of business - .93 - .93 Cumulative effect of change in accounting - (.70) - - -------- --------- -------- -------- Net income (loss) $ (.30) $ ( .85) $ (.15) $ .15 ======= ======= ======= ======= Average shares outstanding 11,893 11,737 11,976 11,737 ======== ======= ======= =======
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements. 3 4 WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES ---------------------------------------- CONDENSED CONSOLIDATED BALANCE SHEETS ------------------------------------- MARCH 31, 1997 AND JUNE 30, 1996 (IN THOUSANDS) ASSETS
March 31, June 30, 1997 1996 (Unaudited) (Audited) ----------- --------- CURRENT ASSETS: Cash $ 2,366 $ 2,460 Accounts receivable, net 42,096 37,226 Inventories 64,365 59,883 Prepaid expenses 3,322 4,096 --------- --------- Total current assets 112,149 103,665 --------- --------- PROPERTY AND EQUIPMENT: Land 1,469 1,393 Buildings 12,759 11,842 Equipment 27,059 23,090 --------- --------- 41,287 36,325 Less accumulated depreciation and amortization (19,595) (18,597) --------- --------- Property and equipment, net 21,692 17,728 COST OF BUSINESSES IN EXCESS OF NET ASSETS ACQUIRED, NET 13,009 13,318 UNAMORTIZED DEBT ISSUANCE COSTS, NET 4,753 5,008 OTHER ASSETS 3,945 2,918 --------- --------- $ 155,548 $ 142,637 ========= =========
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements. 4 5 WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES ---------------------------------------- CONDENSED CONSOLIDATED BALANCE SHEETS ------------------------------------- MARCH 31, 1997 AND JUNE 30, 1996 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, June 30, 1996 1996 (Unaudited) (Audited) ----------- --------- CURRENT LIABILITIES: Current portion of long-term debt $ 21,869 $ 10,972 Accounts payable 27,955 28,607 Accrued liabilities 7,861 11,929 Accrued interest 702 1,441 --------- --------- Total current liabilities 58,387 52,949 --------- --------- LONG-TERM DEBT, NET OF CURRENT PORTION 818 863 SENIOR SECURED DEFERRED COUPON NOTES 69,206 62,723 SENIOR NOTES 47,855 43,026 SENIOR SUBORDINATED NOTES 895 5,724 MINORITY INTEREST IN CONSOLIDATED AFFILIATE 25,018 20,606 STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value per share: Authorized and unissued 2,000 shares -- -- Common Stock, $.01 par value per share: Authorized 22,000 shares; Issued 9,846 at March 31, 1997 and 9,693 at June 30, 1996 97 96 Class B common stock, $.01 par value per share: Authorized 6,000 shares; Issued 2,151 at March 31, 1997 and 2,153 at June 30, 1996 22 22 Paid-in capital 21,645 21,419 Retained deficit (68,072) (64,503) --------- --------- (46,308) (42,966) Cumulative currency translation adjustments (323) (288) --------- --------- Total stockholders' equity (deficit) (46,631) (43,254) --------- --------- $ 155,548 $ 142,637 ========= =========
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements. 5 6 WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES ---------------------------------------- CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ----------------------------------------------- (UNAUDITED) FOR THE NINE MONTHS ENDED MARCH 31, 1997 AND 1996 (IN THOUSANDS)
1997 1996 ------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: - ------------------------------------- Net loss $ (3,568) $ (9,882) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Cumulative effect of change in accounting -- 8,213 Reversal of loss on disposal -- (11,000) Minority interest in consolidated affiliate 4,411 -- Non-cash interest 6,483 5,751 Depreciation and amortization 4,585 4,075 Changes in assets and liabilities: Accounts receivable, net (4,870) 1,819 Inventories (5,607) 9,089 Prepaid expenses 774 (239) Other assets (1,149) (7,865) Accounts payable (652) 6,979 Accrued liabilities (4,807) 1,094 Other items, net (35) (333) -------- --------- Net Cash (Used in) Provided by Operating Activities (4,435) 7,701 -------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: - ------------------------------------- Capital expenditures, net (6,737) (3,013) -------- --------- Net Cash Used in Investing Activities (6,737) (3,013) -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: - ------------------------------------- Borrowings under credit agreements 93,485 175,685 Repayments under credit agreements (82,588) (180,602) Repayments of long-term debt (45) (241) Issuance of common stock 226 25 -------- --------- Net Cash Provided by (Used in) Financing Activities 11,078 (5,133) -------- --------- NET DECREASE IN CASH (94) (445) BALANCE, BEGINNING OF PERIOD 2,460 2,106 -------- --------- BALANCE, END OF PERIOD $ 2,366 $ 1,661 ======== =========
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements. 6 7 WAXMAN INDUSTRIES, INC. AND SUBSIDIARIES ---------------------------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------------- (UNAUDITED) MARCH 31, 1997 NOTE 1 - BASIS OF PRESENTATION --------------------- The condensed consolidated financial statements include the accounts of Waxman Industries, Inc. ("Waxman"), its wholly owned subsidiaries and its affiliate, Barnett Inc. (collectively, the "Company"). Waxman USA Inc.("Waxman USA"), a wholly owned subsidiary of Waxman, owns approximately 49.9% of the voting capital stock of Barnett Inc. ("Barnett") and, together with non-voting preferred stock of Barnett Inc. owned by Waxman USA, approximately 54% of the capital stock of Barnett. The condensed consolidated statements of operations for the nine and three months ended March 31, 1997 and 1996, the condensed balance sheet as of March 31, 1997 and the condensed statements of cash flows for the nine months ended March 31, 1997 and 1996 have been prepared by the Company without audit, while the condensed balance sheet as of June 30, 1996 was derived from audited financial statements. In the opinion of management, these financial statements include all adjustments, all of which are normal and recurring in nature, necessary to present fairly the financial position, results of operations and cash flows of the Company as of March 31, 1997 and for all periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The Company believes that the disclosures included herein are adequate and provide a fair presentation of interim period results. Interim financial statements are not necessarily indicative of financial position or operating results for an entire year. These condensed interim financial statements should be read in conjunction with the audited financial statements and the notes thereto included in the Company's Annual Report on Form 10-K, as amended by an amendment thereto on Form 10K/A1, for the fiscal year ended June 30, 1996 filed with the Securities and Exchange Commission. NOTE 2 - BUSINESS -------- The Company believes that it is a leading supplier to the home repair and remodeling market in the United States. Primarily through its indirect wholly owned subsidiaries, Waxman Consumer Products Group Inc. ("Consumer Products"), WOC Inc. ("WOC"), and TWI International, Inc. ("TWI") and its affiliate Barnett, the Company markets and distributes a broad range of plumbing, electrical and hardware products to over 56,000 customers in the United States, including do-it-yourself warehouse home centers, home improvement centers, mass merchandisers, hardware stores, lumberyards and to plumbing and electrical repair and remodeling contractors, independent hardware stores and maintenance managers. NOTE 3 - INCOME TAXES ------------ The Company accounts for income taxes in accordance with the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). The Company is currently unable to recognize any income tax benefit relating to its net loss. The tax provision for the nine and three month periods ended March 31, 1997 represents Barnett's tax provision and a provision for state and foreign taxes. At June 30, 1996, the Company had approximately $56.1 million of available domestic net operating loss carryforwards which will expire between 2008 and 2011. The benefit of these net operating loss carryforwards has been reduced 7 8 100% by a valuation allowance. The Company will continue to evaluate the valuation allowance and to the extent that the Company is able to recognize tax benefits in the future, such recognition will favorably affect future results of operations. The Company will utilize a portion of the net operating loss carryforward in connection with the Barnett Secondary Offering. See Note 8. The Company also has alternative minimum tax carryforwards of approximately $720,000 at June 30, 1996 which are available to reduce future regular income taxes over an indefinite period. As a result of the Barnett Public Offering (as defined below), Barnett is no longer included in the Company's consolidated tax return. Therefore, the Company's remaining net operating loss carryforwards are not available to offset Barnett's taxable income. NOTE 4 - IMPACT OF NEW ACCOUNTING STANDARDS ---------------------------------- In October 1995, the Financial Accounting Standards Board ("FASB")issued SFAS No. 123, "Accounting for Stock-Based Compensation," which establishes new accounting standards for the measurement and recognition of stock-based awards. SFAS No. 123 permits entities to continue to use the traditional accounting for stock-based awards prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees," however, under this option, the Company will be required to disclose the pro forma effect of stock-based awards on net income and earnings per share as if SFAS No. 123 had been adopted. SFAS No. 123 is effective in fiscal 1997. The Company intends to continue using the provisions of APB Opinion No. 25 to account for stock-based awards. In February 1997, the FASB issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128") to be effective beginning with the Company's quarter ending December 31, 1997. Under SFAS 128, the Company's basic earnings per share and fully diluted earnings per share will be presented on the face of the income statement. The denominator for basic earnings per share is determined using only the weighted average number of outstanding shares during the period. The computation for fully diluted earnings per share has not changed materially. For the quarter and nine months ended March 31, 1997, the number of shares used to compute basic earnings per share is the same as the weighted average number of shares used to compute primary earnings per share. NOTE 5 - BARNETT ------- In April 1996, Barnett completed an initial public offering (the "Barnett Public Offering") of its common stock (the "Barnett Common Stock"). In the offering, 7,207,200 shares, representing approximately 55.1% of the Barnett Common Stock, were sold in the aggregate by Barnett and Waxman USA Inc., a direct wholly owned subsidiary of Waxman, at an initial public offering price per share of $14.00. Since the consummation of the Barnett Public Offering, the cash flow generated by Barnett is no longer available to the Company other than the amounts paid to the Company for services, or the pro rata amounts, if any, distributed by Barnett in the form of a common stock dividend. Through March 31, 1997, the Company consolidated Barnett's financial results and recorded a charge on its statement of operations for the net income related to the outside stockholders' common stock interest. See Subsequent Events, Note 8. NOTE 6 - SUPPLEMENTAL CASH FLOW INFORMATION ---------------------------------- Cash payments during the nine months ended March 31, 1997 and 1996 included income taxes of $6.9 million and $0.7 million and interest of $6.1 million and $12.4 million, respectively. For the three months ended March 31, 1997 and 1996, cash payments for income taxes amounted to $1.3 million and $0.2 million and interest of $2.9 million and $3.8 million, respectively. 8 9 NOTE 7 - EARNINGS PER SHARE ------------------ Earnings per share are calculated by dividing net income by the weighted average number of shares of common stock and common stock equivalents outstanding. The number of shares of common stock used to calculate primary and fully diluted earnings per share are as follows:
Year-to-Date Quarter ------------ ------- March 31, 1997 - 11,893,000 11,976,000 March 31, 1996 - 11,737,000 11,737,000
NOTE 8 - SUBSEQUENT EVENTS ----------------- SECONDARY OFFERING - BARNETT On April 18, 1997, the Company and Barnett completed a secondary offering of 1,125,000 and 375,000 shares of Barnett Inc. common stock, respectively. The underwriters' have been granted a 30 day over-allotment option to purchase an additional 225,000 shares. Net proceeds from the offering amounted to $18.7 million for the Company and $6.2 million for Barnett, after the underwriters' discount. As a result of the offering, the Company will own 7,337,000 shares, or 45.7 percent of Barnett, and will begin to utilize the equity method to account for its investment in Barnett. SALE OF MADISON EQUIPMENT COMPANY On April 24, 1997, the Company sold Madison Equipment Company ("Madison"), a division of WOC, to AFC Cable Systems, Inc. for $2.0 million in cash. For the nine months ended March 31, 1997, Madison's net sales and operating income amounted to $5.0 million and $0.2 million, respectively, and net assets were approximately $2.6 million. These subsequent event transactions should result in a net gain of approximately $13 million. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS ----------------------------------- A. RESULTS OF OPERATIONS FOR THE NINE MONTHS AND THREE MONTHS ENDED MARCH 31, 1997 AND 1996. RESULTS OF OPERATIONS - --------------------- This Quarterly Report contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including, without limitation, statements regarding the Company's customer base and the sufficiency of the Company's liquidity and sources of capital. Any statements contained herein which are not historical facts or which contain the words expect, believe or anticipate, or words of similar import shall be deemed to be forward-looking statements. These forward-looking statements are subject to certain risk, uncertainties and other factors which could cause actual results to differ materially. Additional information regarding these and other factors that could potentially affect the Company or its financial results may be included in the Company's filings with the Securities and Exchange Commission. Waxman USA owns 49.9% of the common stock of and, together with its preferred shares, a 54% economic interest in Barnett. Barnett's results are 9 10 consolidated with the Company's and the Company records a charge in its statement of operations for the net income related to the outside stockholder's common stock interest. NET SALES - --------- Consolidated net sales for the nine months and third fiscal quarter ended March 31, 1997 amounted to $199.6 million and $65.6 million, as compared to $175.5 million and $58.5 million for the comparable periods last year, respectively. The increases of 13.8% for the nine months and 12.1% for the quarter are primarily attributable to record sales for both periods by Barnett. Barnett's net sales of $117.1 million and $40.8 million for the nine months and quarter ended March 31, 1997 represent increases of 25.4% and 23.9% over the comparable periods last year. The increases are primarily attributable to the successful implementation of its growth strategies, including continued expansion of its promotional flyer mailings, accelerated new product offerings and investments in its infrastructure. Net sales for the Company's wholly owned operations amounted to $82.5 million and $24.9 million for the nine months and quarter ended March 31, 1997, respectively, an increase of $0.4 million or 0.5% for the nine months and a decrease of $0.8 million or 3% for the three months ended March 31, 1997. The Company's Consumer Products' operation experienced net sales decreases of 5.4% for the nine months and 7.6% for the quarter ended March 31, 1997. The reduction was primarily the result of the discontinuance of the electrical products' line and certain lower margin products in the fourth quarter of fiscal 1996 and the loss of a customer due to its bankruptcy early in the first quarter of fiscal 1997. Excluding those items, Consumer Products' net sales would have increased approximately 1% for the nine months. The Company's U.S. Lock and foreign operations reported strong sales increases for both the nine month and quarter ended March 31, 1997, which partially offset the reduction in net sales at Consumer Products. GROSS PROFIT - ------------ For the nine months ended March 31, 1997, gross profit increased $14.5 million or 26.0% to $70.0 million from $55.5 million for the comparable period last year. Gross margins increased for the nine months ended March 31, 1997, improving to 35.1% from 31.6% last year (34.0% before non-recurring adjustments). The Company's wholly owned operations' gross margin improved to 36.4% for the current nine month period as compared to 29.8% last year (30.8% before non-recurring adjustments). There was a general improvement at nearly all of the Company's operations. Gross profit for the quarter ended March 31, 1997 amounted to $23.2 million, an increase of $7.5 million or 47.6% over the $15.7 million in the comparable period last year. The gross margin for the current year's third quarter was 35.4% as compared to 26.9% last year (34.0% before non-recurring adjustments). The Company's wholly owned operations reported gross margin of 37.3% for the three months ended March 31, 1997 as compared to 19.0% last year (35.2% before non-recurring adjustments). SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - -------------------------------------------- Selling, general and administrative ("SG&A") expenses for the nine months ended March 31, 1997 and 1996 amounted to $50.5 million or 25.3% of consolidated net sales and $48.0 million or 27.3% of consolidated net sales, respectively. For the Company's wholly owned operations, there was a general decrease of $3.5 million in SG&A expenses, which amounted to $24.9 million. The prior year expense included $3.5 million related to the non-recurring adjustments. As a percent of net sales, SG&A expenses for the wholly owned 10 11 operations amounted to 30.2% and 34.6% for the nine months ended March 31, 1997 and 1996, respectively. Barnett's SG&A expenses increased by $5.9 million to $25.5 million for the nine months ended March 31, 1997, a 3.8% increase when expressed as a percentage of net sales. Barnett's increase was attributable to the expansion of its telesales operations which resulted in increased personnel expenses and also to increased costs associated with establishing a same day shipping policy to benefit its customers. For the quarters ended March 31, 1997 and 1996, SG&A expenses amounted to $17.1 million and $18.2 million, or 26.1% and 31.1% of consolidated net sales, respectively. SG&A expenses for the Company's wholly owned operations amounted to $8.3 million, or 33.3% of net sales, for the quarter ended March 31, 1997 as compared to $11.4 million, or 44.4% of net sales, for the same quarter last year. Last year's operating expenses, before adjustment for 3.5 million amounted to $8.6 million, or 33.4% of net sales. The increase in net sales, coupled with the slight decrease in expenses at the Company's wholly owned operations resulted in an overall improvement in the ratio of expenses to consolidated net sales. INTEREST EXPENSE - ---------------- Interest expense for the nine months ended March 31, 1997 and 1996 amounted to $12.5 million and $19.9 million, respectively. Interest expense amounted to $4.3 million for the third quarter of fiscal 1997 as compared to $6.6 million in the comparable period last year. The reduction of interest is due mainly to the repayment of indebtedness with the net proceeds from the April 1996 initial public offering of Barnett. Average borrowings for the current year's nine month period amounted to $134.1 million, with an weighted average interest rate of 11.7%, as compared to $205.1 million of debt with an weighted average interest rate of 12.1% last year. PROVISION FOR INCOME TAXES - -------------------------- The provision for income taxes for the nine months ended March 31, 1997 and 1996 amounted to $6.1 million and $0.3 million, respectively. For the third quarter of fiscal 1997, the provision for income taxes amounted to $2.1 million as compared to $0.1 million in the comparable period last year. For the fiscal 1997 nine months and quarter, the provision for taxes primarily represents Barnett's tax provision and state and foreign taxes of the Company's wholly owned operations. The difference between the effective and statutory tax rates is primarily due to the domestic losses not benefited and goodwill amortization. With the completion of the Barnett public offering, Barnett is no longer included in the consolidated tax return of the Company and is unable to benefit from the Company's net operating loss carryforwards. In accordance with the provisions of SFAS No. 109, the Company is unable to benefit its losses in the current year. MINORITY INTEREST IN CONSOLIDATED AFFILIATE - ------------------------------------------- The Company recorded a charge of $4.4 million and $1.6 million, respectively, for the nine months and quarter ended March 31, 1997 for the 50.1% of Barnett's net income associated with the outside stockholders' common stock interest. REVERSAL OF ESTIMATED LOSS ON DISPOSAL - -------------------------------------- In the third quarter of fiscal 1996, the Company reversed an $11.0 million estimated loss on the disposal of its Consumer Product division, which had been recorded at June 30, 1995. The Company ceased its effort to sell Consumer Products upon the consummation of the initial public offering of Barnett. 11 12 As part of its strategic review of Consumer Products, the Company also recorded certain non-recurring and restructuring charges relating to the carrying value of operating assets and liabilities. Such charge amounted to $7.7 million, including $4.2 million in cost of sales and $3.5 million in operating expenses. The charges included $2.0 million for the write down of inventory, $1.6 million for certain accounts receivable balances, $2.0 million for costs in developing a management information system, $0.5 million of abandoned product development costs and $1.6 million for various liabilities. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING - ----------------------------------------- Effective July 1, 1995, the Company changed its method of accounting for the cost of obtaining long term business. These costs represent the amount paid in connection with a customer's commitment to purchase products from the Company for a specified period. Prior to this change, the Company capitalized the consideration paid to the new or existing customer (i) for the right to supply such customer for a specified period and (ii) to purchase competitor's merchandise that the customer has on hand when it changes suppliers, less the salvage value received by the Company. These costs were then amortized over the period deemed to be benefited. The Company's new policy is to amortize these costs in the fiscal year incurred due to the uncertainty of today's competitive retail environment. The cumulative effect of this change on prior years of $8.2 million, without tax benefit, is reported as a separate charge in the first quarter of fiscal 1996. NET LOSS - -------- The Company's net loss for the nine months and quarter ended March 31, 1997 amounted to $3.6 million and $1.8 million or $.30 and $.15 per share, respectively. This compares to a loss of $12.7 million and $9.2 million or $1.08 per share and $.78 per share in the corresponding prior year periods, before the fiscal 1996 adjustments for a $11.0 million reversal of loss on the disposal of Consumer Products and the $8.2 million cumulative effect of the change in accounting in the nine months of fiscal 1996 discussed above. The net loss per share for the nine months last year amounted to $.85, while net income of $.15 per share was reported for the quarter due to the $.93 per share reversal of the estimated loss on disposal of Consumer Products. B. LIQUIDITY AND CAPITAL RESOURCES ------------------------------- At March 31, 1997, the Company had $7.1 million available under its credit agreement with BankAmerica Business Credit, Inc. (the "Credit Agreement"). The Credit Agreement, which expires in May 1999, contains certain covenants and restrictions, including a material adverse effect clause and the requirement to maintain cash collateral accounts. Accordingly, borrowings under the Credit Agreement have been classified as a current liability. The Company was in compliance with all loan covenants at March 31, 1997. At March 31, 1997, the Company had working capital of $53.8 million and a current ratio of 1.92 to 1. The Company relies primarily on Consumer Products for cash flow because Barnett's cash flow is no longer available to the Company since the completion of the Barnett public offering. Consumer Products' customers include do-it-yourself warehouse centers, home improvement centers, mass merchandisers, hardware stores and lumberyards. Consumer Products may be adversely affected by prolonged economic downturns or significant declines in consumer spending. There can be no assurances that any such prolonged economic downturns or significant declines in consumer spending would not have a material adverse impact on the Consumer Products' business and its ability to generate cash flow. Furthermore, Consumer Products' largest customer, Kmart and its subsidiary, Builders Square, historically have accounted for approximately 42% 12 13 to 44% of Consumer Products' total net sales. Although, Consumer Products believes it will retain all of its Kmart business, all large merchandisers review supply arrangements from time to time and there can be no assurance that this relationship will continue or as to the terms of any relationship that does continue. Furthermore, Kmart has stated that it intends to sell its Builders Square business, which accounted for 24.8%, 24.7%, and 23.9% of Consumer Products' net sales in fiscal 1996, fiscal 1995 and the nine months ended March 31, 1997. Kmart issued a press release in February 1997, stating that it was negotiating to sell the Builders Square business to Home Base, a leading regional warehouse home center, which is not and has not been a customer of Consumer Products. In April 1997, it was announced that the Builders Square discussions with Home Base were terminated. Although, Kmart recently completed a review of its and Builders Square's vendor relationships, it is likely that any purchaser of Builders Square would conduct a similar review. In the event Consumer Products were to either lose Kmart or Builders Square as a customer or Kmart or Builders Square were to significantly curtail its purchases from Consumer Products, there would be material short-term adverse effects until the Company could modify Consumer Products' cost structure to be more in line with its reduced revenue base. The Company does not have any commitments to make substantial capital expenditures. In furtherance of the Company's ongoing efforts to increase its liquidity and improve its capital structure in January 1997, Waxman USA completed a private exchange offer pursuant to which it exchanged an aggregate of $4.8 million of Waxman USA's 11 1/8% Senior Notes due 2001 for a like amount of Waxman 13 3/4% Senior Subordinated Notes June 1999. As a result, there now remains outstanding $.9 million of Senior Subordinated Notes. The Company is continuing to review other business strategies for reducing its leverage. In April 1997, the Company completed a secondary offering of 1,125,000 shares of Barnett common stock owned by Waxman USA at $17.50 per share and received $18.7 million of net proceeds. The underwriters have been granted a 30 day option to acquire an additional 175,000 shares owned by Waxman USA, which could result in an additional $2.9 million in net proceeds to the Company. The Company also sold one of its smaller divisions for $2.0 million. Pending the application of the net proceeds of these transactions to reinvestment in the Company's businesses or the permanent repayment of debt, the proceeds have temporarily been used to pay down all of the line of credit with BankAmerica, with the excess being invested in short term liquid investments. The Company believes that the funds generated from operations, along with the funds available under the Credit Agreement (and any refinancing thereof), will be sufficient to satisfy the Company's liquidity requirements until December 1, 1999 (the date that the cash interest becomes payable by the Company under its 12 3/4% Deferred Coupon Notes due 2004). The Company does not anticipate that available cash flow from operations will be sufficient to pay cash interest on the Deferred Coupon Notes commencing in December 1999. Therefore, the Company expects to repay or refinance such debt in or prior to December 1999. DISCUSSION OF CASH FLOWS - ------------------------ Net cash used by the Company's operations was $4.4 million for the nine months ended March 31, 1997, due mainly to increases in inventories and accounts receivable and a decrease in accruals (principally accrued income tax and accrued interest payments). Cash flow used for investments totaled $6.7 million, primarily relating to Barnett's operations, including capital expenditures for improved management information systems, the buy-out of an operating lease incurred in prior years and expansion and/or relocation of several of Barnett's distribution centers to accommodate new product offerings. Cash flow from financing totaled $11.1 million. Net debt 13 14 borrowings during the nine months ended March 31, 1997 under the Credit Agreement totaled $10.9 million. 14 15 PART II. OTHER INFORMATION ----------------- ITEM 5. OTHER INFORMATION ----------------- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K -------------------------------- a) See Exhibit 27. b) Reports on Form 8-K The Registrant filed a report on Form 8-K on February 27, 1997, incorporating a press release with respect to the Barnett Secondary Offering. All other items in Part II are either inapplicable to the Company during the quarter ended March 31, 1997, the answer is negative or a response has been previously reported and an additional report of the information need not be made, pursuant to the instructions to Part II. SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. WAXMAN INDUSTRIES, INC. ----------------------- REGISTRANT DATE: MAY 2, 1997 BY: /s/ MARK W. WESTER ----------------------------- MARK W. WESTER CHIEF FINANCIAL OFFICER AND VICE PRESIDENT-FINANCE (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER) 15 16 EXHIBIT INDEX ------------- EXHIBIT PAPER (P) OR - ------- ------------ NUMBER DESCRIPTION ELECTRONIC (E) - ------ ----------- -------------- (27) Financial Data Schedule (submitted to the Securities and Exchange Commission in Electronic Format) E EX-27 2 EXHIBIT 27
5 9-MOS JUN-30-1997 JUL-01-1996 MAR-31-1997 2,366 0 44,506 2,410 64,365 112,149 41,287 19,595 155,548 58,387 118,774 119 0 0 (46,750) 155,548 199,616 199,616 129,634 50,468 0 0 12,541 6,973 6,130 843 0 0 0 (3,568) (.30) (.30)
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